New Leveson shock as evidence emerges of "brazen" Michel threat

News International's Fred Michel told a senior Liberal Democrat their newspapers' coverage of the coalition would turn "nasty" if the BSkyB bid was referred to Ofcom, the Leveson inquiry heard today.

Norman Lamb admitted to the inquiry that he was the Liberal Democrat who had been contacted by Mr Michel. Vince Cable has alluded to the meeting during his testimony but kept Mr Lamb's identity secret.

"They [News International] have been supportive of the coalition but he [Mr Michel] was worried," Mr Lamb said today, as he described the "extraordinary" meeting between himself and News International's chief lobbyist on the BSkyB deal.

Mr Lamb said he was told that the newspapers might even be tempted to back the Alternative Vote (AV) campaign during last year's referendum, depending on Dr Cable's behaviour towards the bid.

"I left that meeting with a very clear understanding that they had tried to be helpful in the period since the election, but that if things went the wrong way in terms of the actions that Vince Cable took exercising his responsibility then he was concerned that things could change," he told the inquiry.

"I took it to mean very clearly that the positive coverage they said they had given might change."

Mr Lamb then took the information to Nick Clegg who was "horrified" by what he had to say.

"We will lose the only papers who have been positive," the MP quoted him as saying.

Asked why he had taken so long to appear before the inquiry Mr Lamb said he felt he had to shine further light on events once the business secretary had made his statement.

"When Vince Cable gave his evidence I felt I had to tell the story of what happened. In a sense, you were left with a gap," he said.

News International lawyers at the inquiry said they were taken by surprise by Mr Lamb's comments and had not had time to react. Mr Michel denies making any threats.

The evidence from Mr Lamb is potentially devastating for the Murdoch empire, as it bolsters those who claim there is a direct link between the editorial policy of its outlets and the government's treatment of its commercial concerns.

While inquiry counsel Robert Jay has stressed that most of the reported cosiness between government and the Murdoch empire comes in the form of unspoken assumptions, the Lamb evidence suggests a much more explicit approach being adopted under Mr Michel's tenure as lobbyist.